Solar Stocks Face Cloudy Days Ahead

by Aaron Levitt | June 3, 2014 9:37 am

There’s no denying that solar stocks were one of the best-performing sectors of 2013.

The broad sector measure — the Guggenheim Solar ETF (TAN[1]) — managed to surge by more than 120% throughout the year as a combination of dwindling costs and rising subsidies top solar stocks finally catch up to the their long-term promise. The sun was certainly shining for the PV markers.

But then the clouds started rolling in.

A litany of problems hit the sector hard — from dwindling subsidies and oversupply to dumping investigations and import tariffs. In fact, solar stocks were hit so hard, several manufacturers — like LDK Solar (LDKSY[2]) — began to file for bankruptcy.

Which brings us to today.

After a series of earnings reports from several chief producers, the outlook for the solar stocks could only be described as partly cloudy at best. For investors, it could be a rocky and volatile road ahead for the sector — especially if you bet on the wrong horse.

Either Sunshine Or Thunderstorms

So far, 2014 has been a really mixed bag for the solar sector, and most of it has really come down to each firm’s underlying business model.

Take U.S. solar kingpin First Solar (FSLR[3]) for example.

For the first quarter[4], FSLR’s earnings jumped 66% year-over-year to $112 million, or $1.10 per share. That came on revenue growth of 26% to $950 million. Both of those gains managed to trump Wall Street estimates. The key for First Solar was its diverse strategy of being both a producer of panels as well as a developer of utility-sized solar farms. Essentially, FSLR builds then leases or sells outright these massive multi-gigawatt power plants to energy starved utilities. So far, those solar farms continue to be a main driver of FSLR’s profits.

The same goes likewise for rival SunPower (SPWR[5]). After losing money in 2012, the firm switched gears and copied the developer model. That helped drive profits of $95 million for all of 2013. It’s continued with the strength in grid-scale solar farms into this year. For the first quarter of 2014[6], SPWR managed to amass revenues of $683 million.

But it hasn’t all been sunshine.

Take Chinese solar stock names ReneSola (SOL[7]) and China Sunergy (CSUN[8]). Both firms strictly manufacturer cells and solar modules. More importantly, both firms managed to lose money in their latest earnings reports. In fact, they both managed to lose a lot and more than what analysts predicted. SOL managed to miss expectations by about 6 cents per share, while CSUN hit the ball far right by 15 cents.

To be fair, it wasn’t all clouds in world of solar panels. Chinese leader Trina Solar (TSL[9]) managed to hit it out of the park and post a quarterly profit. But TSL’s performance was an outlier, given its size and global scope. The vast majority of the PV panel makers are still hurting hard.

Potential Continuing Clouds

So the real question is whether the good times or bad times will persist for the solar sector. Well, analysts don’t seem bullish on the sectors prospects. Both Credit Suisse and Nomura recently put out negative reports on the industry, saying that several of the solar names are actually shorts.

Both investment banks — along with analysts at Axiom Capital — call out China as the main reason for the sell warnings. The group estimates that Chinese demand will actually fall flat of consensus estimates of 14 GW installed in 2014. That should clip earnings during the second half of the year for solar stocks that strictly make panels or panel parts.

Axiom sees[10] another worry in that polysilicon prices are currently listed below cost of production prices. That’ll boost revenues, but devastate profits at the panel makers. Essentially, we’ll be back to the same scenario we had in 2011 and 2012. And remember what happens to firms that are all revenue, no profit….

Then there is the continuing anti-dumping and trade problems facing the sector. While the U.S. and China seemed to have come to an agreement, Europe is battling it out with Asia’s Dragon economy. Meanwhile, India has launched anti-dumping sanctions[11] against China and the U.S. solar producers.

Add in dwindling subsidy rates in key sector drivers like Japan and the United States, plus ultra-cheap natural gas/LNG that solar now must compete with and you have a few major storm clouds brewing in the horizon.

Rainy Days for Solar Stocks

For investors, solar stocks seem to whipsaw on any bit of good or bad news. TSL jumped 31% of its earnings beat, only to fall by the wayside over the next few days. Given just how quickly they move from profits to losses, quarter-to-quarter doesn’t necessarily place them firmly in the “investment” camp.

To that end, the best way to play solar stocks is still the previously mentioned TAN ETF or its rival Market Vectors Solar Energy ETF (KWT[12]). Both offer a broad way to play the entire solar spectrum. And given just how varied the earnings and guidance reports have been, that’s probably the best choice for investors at this point. The good should even out the bad.

The bottom line: Don’t get too excited over the recent gains in solar stock world; there still could be plenty of clouds ahead. A variety of factors will continue to pull the sector in both directions.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.